For some time, banking institutions have handled the presentment of checks for payment in a manual fashion. At a specified time each day, a bank sorts all checks presented to it into bundles, with the bundles pertaining to particular banks on which they are drawn (the "drawee bank"). As the checks are sorted for particular destination banks, they are gathered into batches of about 300 checks. One or more of these batches are than aggregated for shipment to the destination or "payor" bank. A cover letter is attached to each shipment of checks that summarizes the contents of the shipment. Such summary information comprises the name of the payor bank, a number associated with the name of the drawer bank (called the routing transit number), the number of checks in the shipment and the total dollar amount of all of the checks in the batch. The cover letter is termed a Cash Letter. The presenting bank then transfers to the payor bank the "Cash Letter", which includes the cover letter and the bundle of checks.
When the drawee bank receives the Cash Letter, it verifies that the contents of the cash letter, i.e., the checks, agree with the totals contained on the cover letter. The bank also determines whether enough money exists in the payor customer's account to cover payment of the check, and either accepts or rejects payment of the check. The payor bank then notifies the presenting bank regarding any balancing discrepancies or any items which are to be returned.
The above procedure is an over-simplification of the process established for clearing checks between banks. However, it is sufficient to demonstrate the problems associated with such a process. A first problem resulting from the above process is the delay between the time a check is first deposited at the presenting bank and the time the drawee bank accepts or rejects the check. The payor bank has the choice of either placing a hold on the depositing customer's bank account until it is notified of acceptance by the payor bank, or it pays out the money to the presenter and incur the risk that the check will be rejected by the drawee bank.
Many banks choose not to incur such a risk, and therefore place a hold on the presenter's bank account until it is notified that the check has been accepted. However, the time that it takes for the payor bank to be notified that a check has been accepted or rejected may take as long as 7 to 10 days. The Expedited Funds Availability Act of 1987, however, places limits on the length of time that a bank may retain a hold on a customer's funds. In most cases, only two days are allowed for local items, and only three days for non-local items. These time limits can severely expose a bank to risks of loss and fraud by forcing a bank accepting customers deposits to release funds to that customer prior to verification that those funds are, in fact, collectable from the payor institution.
To overcome the problem of delay, banks have attempted to automate the process of gathering checks into cash letters, sending and receiving cash letters, and reconciling these cash letters against their contents. Such attempts at automation have included the installation of check sorter machines that scan checks at very high speeds, and sort these checks into bundles associated with payor banks. The sorter "reads" information contained on the checks such as the routing transit number, the drawer's account number, the check number and the amount of the check. This information is stored in a line of symbols at the bottom of each check in MICR (Magnetic Ink Character Recognition) form. Check sorter machines have been used quite successfully and are well known in the art.
Another attempt at automating the check process is the use of computer systems to record and manage the information associated with the check sorting procedure. Such computer systems interface with the check sorter machines and allow the computer systems to build database information associated with each check that is read. This allows an operator of a computer system to obtain information on checks that have been read such as the total number of checks drawn on specific banks and the total dollars of all checks drawn on specific banks. One such system that accomplishes this task is the IBM CPCS (Check Processing Control System).
Although both of the above attempts have benefitted the banking industry, they have failed to address the problem of delay associated with the transfer of cash letters between banks. Better transportation, overnight express, and other services have helped to improve the transfer of cash letters, but the transfer of the information contained in the cash letters has still been dependent on the physical delivery of the cash letters to the drawee bank. Such dependence on the physical transfer of the cash letters perpetuates the delay associated with acceptance or rejection of particular checks.
Another problem associated with the transfer of cash letters between banks is the inability of either bank to specify, for identification purposes, a particular check that was sorted by the other banks system. As each check is captured on the check sorting machines, a micro-film image is captured, and a unique "item sequence number" is assigned by the CPCS system. The system then maintains a database of item sequence numbers so that it can later identify and find individual checks within the numerous rolls of micro-film. However, since each bank assigns its own item sequence numbers, there is currently no way for one bank to cross reference its own item sequence number to that of another bank.
Although means have come into existence that allow for wire transfer, or electronic transfer of funds from banks, see Deming, U.S. Pat. No. 4,823,264 and Case, U.S. Pat. No. 4,270,042, these systems have dealt with transfer of funds between a bank and an individual user. No system to date has allowed banking systems to electronically transfer, and control the transfer of, the large volume of checks deposited in their institutions every day.